Why a $150 million Star Wars game is going free

Starting this fall, EA's Star Wars: The Old Republic will drop its subscription fees.

Electronic Arts shook up the video gaming field last week with a major price change: Star Wars: The Old Republic, one of the most ambitious and expensive multiplayer games ever made, would soon drop its subscription fees.

The move essentially marks the end of the traditional business model for "massively multiplayer" online games, better known as MMOs. Almost every major publisher has now given in and eliminated its monthly fees -- the genre's bread-and-butter business model for the past 15 years -- relying instead on sales of premium content or virtual items to make money.

It's the Zynga(ZNGA) model -- and it's an unproven risk for the gaming giants.

That hasn't stopped the traditional publishers from flocking to it. Star Wars joins a free-to-play club that includes Everquest, Aion, Guild Wars, Dungeon & Dragons Online, The Lord of the Rings Online, and other landmark games.

There's only one notable absence: Activision Blizzard(ATVI) money machine World of Warcraft, which has 9 million subscribers and generated more than $1 billion in revenue last year. But even Blizzard now allows players to explore its first 20 levels of content for free -- and the company is increasingly selling in-game virtual items and services.

The Old Republic, which launched in late December, was supposed to be the next Warcraft. It started off strong, attracting more than 1 million players in its first three days -- a record pace. But within a few months, the subscribers began drifting away. EA won't comment on the game's current paying audience, saying only that it's north of 500,000.

"The message from players exiting the game is clear: 40% say they were turned off by the monthly subscription, and many indicate they would come back if we offer a free-to-play model," Electronic Arts(EA) CEO John Riccitiello said on a recent call with investors.

It's a straightforward economics problem. The subscription business model cuts off casual players, who can't justify paying $15 a month (particularly in this tough economy) for a game they only touch on occasion. That leaves the hard-core players, who are often reluctant to split their time between more than one or two MMOs at a time.

So EA and its rivals are trying out plan B.

"There's a huge and diverse market of players," says Kate Paiz, executive producer of Turbine's The Lord of the Rings Online. "When you took away that gym membership business model, you suddenly open yourself to a whole new customer base."

The sea change in the MMO business is just the latest step in what has been an entire restructuring of how people view and pay for content. It's the same shift that's sweeping through Hollywood studios and media companies as they confront new players like Netflix(NFLX), Amazon(AMZN) and Hulu.

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EA is one of the best positioned for the change, some believe.

By dropping its subscription fees, Star Wars could attract upwards of 10 million players a month, according Michael Pachter, a well-quoted video game industry analyst with Wedbush Morgan Securities.

But taking a game people used to pay for and making it free isn't as simple as turning off the subscription switch. The game's entire mechanics have to be re-written to entice players to pay for bonus items and upgrades.

That could mean walling off certain new content, or creating an in-game economy that functions better when players throw a few bucks into the game once in awhile.

"There's a peril in designing it wrong," says Fernando Paiz, executive producer of Dungeon & Dragons Online at Turbine (and husband to fellow Turbine employee Kate). "If you are pressuring them too much to spend, you can turn the player off from the whole experience."

Massachusetts-based Turbine was an early adopter of the free-to-play model, with Dungeons & Dragons and Lord of the Rings converting to free-to-play in 2009 and 2010, respectively. The company doesn't disclose specific subscriber numbers, but a Turbine spokesman said the games have seen "exponential growth" since going free. (Turbine was purchased by in 2010 by Warner Bros. Interactive Entertainment, which is a division of CNNMoney parent company Time Warner.)

Not all analysts are sold on free-to-play. Jim Yin, equity analyst with Standard & Poor's, points out that it's difficult for game developers to target multiple audiences -- in this case, hard-core and casual gamers -- with the same title.

"The constituents have different tastes and willingness to pay," Yin says.

Also, free-to-play doesn't address another major problem in the MMO genre: saturation.

There are dozens of games available now, many with similar fantasy or role-playing themes. All of them vying for the same limited amount of time a player has each week.

"None of these games are substantially different from one another, and I don't know if free-to-play is really going to solve that problem," Yin says.